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New federal rules aim to curb risky mortgages

The rules being unveiled Thursday by the Consumer Financial Protection Bureau impose a range of obligations and restrictions on lenders, including bans on risky “interest-only” and “no documentation” loans that helped inflate the housing bubble.

By DANIEL WAGNER •
Published: January 10, 2013

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WASHINGTON — Federal regulators for the first time are laying out rules aimed at ensuring that mortgage borrowers can afford to repay the loans they take out.

This Wednesday, Nov. 14, 2012, photo, shows a home for sale in Leucadia, Calif. Average U.S. rates on fixed mortgages fell to fresh record lows this week, a trend that is boosting home sales and aiding the housing recovery. Mortgage buyer Freddie Mac said Wednesday, Nov. 21, 2012, that the average rate on the 30-year loan dipped to 3.31 percent, the lowest on records dating back to 1971. That's down from 3.34 percent last week, the previous record low. (AP Photo/Gregory Bull) ORG XMIT: NYBZ143

The rules being unveiled Thursday by the Consumer Financial Protection Bureau impose a range of obligations and restrictions on lenders, including bans on risky “interest-only” and “no documentation” loans that helped inflate the housing bubble.

Lenders will be required to verify and inspect borrowers' financial records. They generally will be prohibited from saddling borrowers with loan payments totaling 43 percent of the person's annual income.

CFPB Director Richard Cordray, in remarks prepared for an event Thursday, called the rules “the true essence of ‘responsible lending.'”

The rules, which take effect next year, aim to “make sure that people who work hard to buy their own home can be assured of not only greater consumer protections but also reasonable access to credit,” he said.

Cordray noted that in years leading up to the 2008 financial crisis, consumers could easily obtain mortgages that they could not afford to repay.

In contrast, in subsequent years banks tightened lending so much that few could qualify for a home loan.

The new rules seek a middle ground by protecting consumers from bad loans while giving banks the legal assurances they need to increase lending, Cordray said.

The mortgage-lending overhaul is a priority for the agency, which was created under the 2010 financial law known as the Dodd-Frank Act.